President Donald Trump has been angry about trade for nearly half a century — and throughout all that time, he’s kept on making the same complaint.
The problem, he says, is that the US has trade deficits with other countries. He believes that, if we buy more from a country than they buy from us, the other country is “beating” us. And he wants to “beat” them instead.
On Sunday, Trump said he’d told foreign leaders seeking tariff relief that “we’re not going to have deficits with your country.” He added: “To me, a deficit is a loss. We’re going to have surpluses or at worst, going to be breaking even.”
To most in the economic and policy communities, this thinking seems downright bizarre in a way that goes beyond typical protectionism.
There’s a range of views on whether the US’s overall trade deficit with the rest of the world is too high, or whether it’s nothing to worry about. There’s also a range of views about whether the US needs to do much more to “decouple” from Chinese manufacturing due to national security concerns, and whether the US should do more to promote manufacturing jobs at home.
Trump’s obsession with bilateral trade deficits — his idea that if the US has a trade deficit with any significant trading partner, it is somehow losing — is the really weird thing. But it’s driving his administration’s policy.
Trump’s “Liberation Day” tariff levels for particular countries were determined, at the president’s request, by the relative size of the trade deficit the US has with each country. That’s why poor countries like Vietnam that have become manufacturing hubs for exports to the US got hit hardest. Trump’s trade deficit obsession also explains why he’s been beating up on allied or friendly countries, like Canada — even though that hurts efforts to build a global coalition against China.
Economists have many objections to Trump’s trade deficit fixation. It ignores that Americans benefit from buying things made in other countries. Trump’s thinking is so zero-sum that he ignores that trade can allow countries to specialize and let everyone produce more than they would have otherwise. His trade deficit fixation is specifically about goods, and he regularly ignores numbers showing a big US advantage in exports of services.
But let’s put aside those objections and accept at face value Trump’s apparent objective: to get the US to have trade surpluses with as many countries as possible. It may not sound so bad — we’ll just make and sell more stuff, or buy less of their stuff. There are, however, some deeper problems inherent in this concept.
The problems with Trump’s trade deficit strategy
In theory, there are two ways the US can reduce its bilateral trade deficit with a particular country. We can increase our exports to that country, or we can decrease our imports from that country.
Trump hopes his tariffs can make one or both of these happen. Tariffs make imports from other countries more expensive, meaning, in theory, Americans will buy less of them. His hope is that, with foreign goods newly expensive, we will begin manufacturing more things at home again — both for our own use, and to be exported and sold abroad.
But things are not exactly so simple, and such a strategy will face several problems.
1) The supply chain problem: Supply chains are globally interconnected, so US-based manufacturers currently use many imported parts and materials to make their products. Those parts and materials are now being hit by Trump’s tariffs, and getting more expensive. So the price of the US-made products will go up too.
It’s unclear how the math for all this will shake out. But Sen. Ted Cruz (R-TX) said last week that he’d spoken to a US car company that told him that the tariffs on all their imported parts might actually hurt them more than foreign car companies hit with a singular tariff on US car sales.
Trump is aware of this concern, and in 2020 he mused that he wants all supply chains to be in the US, which would make the country fully independent of the global trading system. That would be even more massively disruptive, difficult, and expensive — bringing a truly monumental shock to the economy and a collapse of Americans’ living standards.
2) The workforce problem: If the US is suddenly going to start manufacturing many more things that we currently buy abroad, a lot more people are going to work in manufacturing. And not just of cars and high-end electronics — we’re talking garments, toys, and simpler appliances like toasters. (As well as agricultural products, since tariffs are being put on those imports too.)
Who is going to work in all these manufacturing jobs? It isn’t meant to be unauthorized immigrants, since in theory they are being deported. Generally, if a company has trouble attracting workers, it would have to offer higher wages. But the more a company spends on labor costs, the more it will have to raise prices, which will make US exports less competitive.
Commerce Secretary Howard Lutnick has suggested robots will simply do much of the US manufacturing work. That reminds me of the joke about how the economist stranded on a desert island would open a can: He’d just say, “assume I had a can opener.” Lutnick is assuming many highly advanced robots.
3) The confidence problem: If the US president set new high tariff levels and could guarantee that they were permanent, that could be very economically damaging, but at least businesses would be able to plan accordingly. Trump’s chaotic policy rollout, and its reliance on poor-quality analysis, has only deepened uncertainty about market conditions in the US in the future. And if businesses feel uncertain — and like Trump can and will throw their business model into chaos on a whim — they’re going to delay making big new investments in US-based manufacturing.
4) The currency problem: A major factor affecting the strength of any country’s exports is the strength of that country’s currency. Currently, the US has a strong dollar. That strong dollar is good for Americans purchasing lots of foreign-made goods — but it makes it more expensive for foreigners to purchase US-made goods.
This is why some Trump policy rationalizers, like Council of Economic Advisers chair Stephen Miran, have previously argued that the ultimate endgame of Trump’s trade war has to be a global accord to weaken the value of the dollar. Before joining Trump’s administration, Miran wrote a paper theorizing that such a global agreement could be called the “Mar-a-Lago Accord.”
But Trump himself has said conflicting things about whether he’d like the dollar to be strong or weak. And will Americans actually be happy about getting a weaker currency that will reduce their ability to purchase foreign-made things?
